A Brief History Of IVAs

In UK law, bankruptcy has been around for centuries, the first recognised legislation being the Bankruptcy Act of 1542. IVAs are much more recent, introduced in 1986.

The Insolvency Act 1986 created the procedure called an Individual Voluntary Arrangement, by which an individual with unsecured debts which they could no longer pay when demands fell due, could be offered an alternative to bankruptcy.

The IVA was introduced as part of the 1986 Insolvency Act.

At the time, consumer credit was not as excessive as it is now and the IVA was primarily aimed at individuals with businesses, for whom the only option was bankruptcy. Bankruptcy meant that their business would be shut down and any assets sold off, resulting with a loss of income for the individual, and also the loss of jobs for any employees they may have.

Returns to creditors in bankruptcy are notoriously poor as any assets the debtor may have would simply be sold off at auction, often achieving a very low value. Therefore bankruptcy too often is a lose-lose situation for everyone.

Under an IVA, the individual could propose to continue their business and to make contributions from future profits towards their historic debts. They may also propose to dispose of any assets they did not need for the operation of their ongoing business in a more structured way in order to achieve a better value. This had a number of benefits:

• The individual and any employees had ongoing income and would therefore not have to claim benefits from the state while looking for new employment.
• The return to creditors under an IVA would be better than they could expect to receive under bankruptcy, because:
  • the costs of an IVA are lower than those of Bankruptcy.
  • the value achieved from the sale of any surplus assets would be greater.
  • the debtor would pay a proportion of profits towards past debts which would not be possible in bankruptcy due to the business being closed down.
• In an IVA, trade creditors also have the benefit of ongoing business with the debtor.

The Consumer IVA

There is no legal difference between an IVA for a consumer and an IVA for someone who is in business. However, an IVA for someone who is employed and has normal consumer debts (credit cards, loans etc.) is much simpler to deal with than for someone who is self-employed or running a business and may have complex tax affairs and debts with trade suppliers.

Individuals who are running a business will have to provide evidence by way of trading and cash flow forecasts to show that their business will be profitable in the future and allow them to make a contribution towards their past debts. People in regular PAYE employment or in receipt of other regular income just have to show that their household budget allows for them to make monthly contributions.

These two types of IVA referred to as a “Consumer IVA” and a “Commercial or Self Employed IVA”.

So, IVAs were intended for the business person, but now the vast majority of IVAs are Consumer IVAs. Key to this transformation was Lathams Chartered Accountants seeing the potential and launching Debt Free Direct in 1997. This company was the first to propel the IVA as a mass market consumer product and achieved a high level of exposure with television and newspaper adverts. Soon, many other companies followed suit.

Through the 90’s and early 2000s individuals who were PAYE employees began to take on more and more consumer credit, and the numbers of individuals seeking help rose sharply.

The table shows the increase in IVAs from the year they were introduced, 1987, to 2014.

Creditors in consumer IVAs are typically well-known high street lenders as opposed to Trading Individuals who would primarily have outstanding liability with HMRC and trade creditors relevant to their business.

As growth in the volume of IVAs emerged, banks (creditors) began to get overwhelmed with IVA proposals and looked to outsource the process of dealing with all these applications. A limited number of agents began to act for the major banks and standard practices began to emerge in the way they dealt with IVAs, what expenditure and fees they would allow and what provisions they expected to see in a proposal.

The 2008 IVA Protocol

During 2006/2007, there was growing resistance to IVAs from some creditors (notably HSBC and Northern Rock) which was blocking many fair proposals. It was their view that some IVA providers were misleading consumers about the suitability of IVAs. There was also the issue of fees which has remained high, yet most cases were more straightforward.

This issue was resolved in February 2008 when a code of conduct was agreed between the IVA providers and the bodies who regulate them. This became known as the IVA Protocol. See BBC coverage from 2008 explaining this.

The Protocol IVA is aimed at individuals who are in receipt of a regular income either from employment or from a regular pension, have 3 or more lines of credit from 2 or more creditors. Age is not a consideration, nor is the debt level, though both factors will impact on the overall viability of the IVA. The Protocol IVA is also suitable for both home owners and non home owners. There should be no circumstances where the individual would be forced to sell their property instead of releasing equity. The only exceptions would be where this was proactively proposed by the individual.

This protocol, and the large scale operation of many IVA providers, have reduced the costs and the fees involved. Previously an IVA was only a viable option for debts of £20,000 and over when the client could afford to repay at least £200 per month. This is now greatly reduced.